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Semi‐Structural Forecasting of UK Inflation Based on the Hybrid New Keynesian Phillips Curve
Author(s) -
Posch Johanna,
Rumler Fabio
Publication year - 2015
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2319
Subject(s) - new keynesian economics , phillips curve , inflation (cosmology) , economics , econometrics , marginal cost , series (stratigraphy) , open economy , macroeconomic model , random walk , keynesian economics , macroeconomics , monetary policy , microeconomics , mathematics , statistics , paleontology , physics , theoretical physics , exchange rate , biology
We develop a semi‐structural model for forecasting inflation in the UK in which the New Keynesian Phillips curve (NKPC) is augmented with a time series model for marginal cost. By combining structural and time series elements we hope to reap the benefits of both approaches, namely the relatively better forecasting performance of time series models in the short run and a theory‐consistent economic interpretation of the forecast coming from the structural model. In our model we consider the hybrid version of the NKPC and use an open‐economy measure of marginal cost. The results suggest that our semi‐structural model performs better than a random‐walk forecast and most of the competing models (conventional time series models and strictly structural models) only in the short run (one quarter ahead) but it is outperformed by some of the competing models at medium and long forecast horizons (four and eight quarters ahead). In addition, the open‐economy specification of our semi‐structural model delivers more accurate forecasts than its closed‐economy alternative at all horizons. Copyright © 2014 John Wiley & Sons, Ltd.